Fears that the global economy could be heading for a repeat of the 2008 financial crash have sent shockwaves through financial markets – prompting a rush to safe havens by investors.

Oil prices fell to a fresh 12-year low on Wednesday and metal prices tumbled in response to warnings that China’s slowdown could derail the global recovery at a time when central banks, which came to the rescue in the credit crunch, have only limited firepower.

As world and business leaders gathered for the annual World Economic Forum in Davos, Switzerland, the FTSE 100 was gripped by panic selling, especially of mining and oil companies that have been hit hard by the global slowdown in manufacturing and trade. Earlier this week, China recorded the slowest rate of economic growth for 25 years.

The index dropped more than 200 points to finish the day down more than 20% from its peak of 7,122, reached in April last year. Such a 20% decline marks the beginning of a bear market.

In New York, shares on the Dow Jones Industrial Average closed 249 points down (1.56%), recovering from a 550-point-drop earlier in the day, while Brent crude dropped to $27.78 a barrel – down by about 70% from its summer 2014 level of $115 a barrel.

Stock markets in Russia, Brazil and Saudi Arabia also dived as concerns mounted that countries already badly hit by the fall in oil prices could be forced to dip further into reserves to prevent an economic crisis. Global equities have had their worst start to a year on record.

William White, a former chief economist of the Bank for International Settlements (BIS), the central bankers club, who now chairs the OECD’s review committee warned that central bankers had “used up all their ammunition”.

“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up. Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said on the eve of the event.

The BIS was one of the few organisations to warn during 2006 and 2007 about the unstable levels of bank lending that eventually led to the Lehman Brothers crash.

Concerns that the global recovery could be derailed began last summer when a devaluation of the Chinese currency sparked a meltdown on the Shanghai stock exchange. A series of economic downgrades to the Chinese and US economies since then, coupled with a rise in US interest rates, have fuelled investors’ misgivings about optimistic forecasts for a recovery in economic fortunes.

Adding to the concerns of a sharp downgrade in global growth this year, a survey for the consultants PwC before the Davos meeting revealed that two-thirds of chief executives saw more threats facing their businesses than three years ago. And the head of the Swiss banking giant UBS, Axel Weber, turned the screw by warning that the world was stuck in an era of low growth.

Last week, an investment analyst at Royal Bank of Scotland advised clients to “sell everything” except the safest high grade bonds after warning of a “cataclysmic” year and the strong likelihood of a stock market crash. His comments came after the chancellor, George Osborne, warned in a new year speech of a “cocktail of threats” to the UK’s prospects from an increasingly uncertain world economy.

Nariman Behravesh, the chief economist at consultancy IHS blamed the Chinese authorities for triggering the global panic. “The big event that I think has captured everyone’s attention is the developments in China and in particular the fact that growth is slowing,” he said.

The Chinese policymakers have fumbled, he said. “They have made some mistakes. And they have added to the uncertainty and the volatility by their behaviour.”

Others blamed the US central bank, the Federal Reserve, for raising interest rates in December to 0.5% when growth was already faltering, increasing borrowing costs to US businesses and encouraging an influx of funds, especially from China.

However, Nouriel Roubini, who was even more vocal than the BIS in warning of the 2008 crash, said that the threat of a crash was overplayed: “It is not going to be like 2008-09. There is not the excessive leverage in the financial system that there was last time.”

But 2016 was going to be a bumpy year until central banks responded with extra stimulus, he warned, saying: “The big thing that should happen is China should stop kicking the can down the road and get on with some serious structural reforms.”

Pierre Moscovici, the European economics commissioner, said that central banks retained some firepower to prevent another crisis. “I don’t feel that the financial crisis is coming back. We don’t feel that we are facing the risk of a breakdown in world growth, but there are downsides that we need to address,” he said.

Maurice Obstfeld, the chief economist at the IMF, said he was concerned that central banks were held back by concerns that an extra stimulus would cause extra inflation in a couple of years. He said: “Central banks should be more relaxed about overshooting their inflation targets and more concerned about deflationary pressures.

“We are in an environment where there is growing concern that inflation expectations are not firmly anchored. So there should be much more concern about deflation.”

Among the biggest losers on the FTSE 100 were the international mining groups, whose business has been particularly hit by the slowdown in China as demand for industrial basics like iron ore and copper has fallen rapidly.

The biggest loser was miner and commodities trading group Glencore, whose shares tumbled nearly 10% to 71p. Less than two years ago, they were changing hands at 375p. Anglo American, the iron ore, copper and diamond miner, lost more than 7%, falling to 221p. Less than four years ago, they were valued at more than £34.